Introduction
Most sciences are riddled with controversy over core concepts; in the case of economics, the definition of capital remains particularly vexed. In the 1970s, Christopher Bliss remarks that “[w]hen economists reach agreement on the theory of capital they will shortly reach agreement on everything else.”Footnote 1 Arguably, there is even less agreement at present, insofar as the concept of capital has splintered all the more, for example, into “natural capital” and “social capital.”Footnote 2 The term capital came originally from the Latin capita for head, and was understood as a sum of money invested in a business. By the eighteenth century, the term capital, demarcated between fixed and circulating, had become central to economic discourse as a critical part of the argument for economic growth. By the 1840s, John Stuart Mill, among others, had articulated the concept of capital in abstract or nonphysical terms, as that which assists labor in the productive sphere. Capital, somewhat akin to energy, could be embodied in objects, known as capital goods, but was in constant circulation, turning over at every instant and, for the most part, expended within a year.Footnote 3
Irving Fisher is credited with devising the label “human capital.”Footnote 4 Adam Smith, however, is heralded as one of the first to broach the concept (in all but in name) and to articulate its main attributes. In addition to machines and improvements of arable land, “fixed capital” includes, for Smith, “the acquired and useful abilities of all the inhabitants or members of the society.”Footnote 5 He outlines more specifically these abilities and motivates the ascription of capital. First, a cost is incurred to cover “the maintenance of the acquirer during his education, study, or apprenticeship,” and second, the capital that is “fixed and realized, as it were, in his person” yields a profit.Footnote 6 Finally, as is true at least in principle of all capital, it is labor-saving: “The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labour, and which, though it costs a certain expence, repays that expence with a profit.”Footnote 7 Also important is Smith’s ascription that the individual embodiment of human capital could be aggregated across a region: “Those talents, as they make a part of his fortune, so do they likewise of that of the society to which he belongs.”Footnote 8
There are several intractable problems with this account. For one, in the opening chapter of An Inquiry into the Nature and Causes of the Wealth of Nations, Smith explains the gains from the division of labor as partly due to breaking up the production process into distinct tasks to take advantage of the enhanced dexterity of the laborer. Yet this improved dexterity appears to have transpired spontaneously on the shopfloor, without a cost for training or an apprenticeship. In fact, Smith underscores that the typical workman is “poor” and “not educated … nor acquainted with the use of the machinery employed.”Footnote 9 He remarks that a few boys under the age of twenty could significantly outproduce a skilled blacksmith in the production of nails if the tasks are divided down into single operations, because this “necessarily increases very much the dexterity of the workman.”Footnote 10 The problematic issue is how to capture the investment in the human capital. Are the young boys continually investing or did their overseer force them to become more dexterous in a specified period of time that then, suddenly, crystallized as human capital? Or was there no investment? Smith conveys the impression that this happened organically because the tasks were individuated, whereas for the blacksmith, certain rigidities limit his capacity for increased productivity.
Second, workers are paid a wage, not a profit. There must therefore be some background arrangement whereby their human capital, while “fixed and realized, as it were, in his person,” is contracted to their employer, the one who owns the capital and thus de facto receives a profit. But what would determine the rate for the laborer, and where is this contract to be found? Does part of the wage to a typical skilled worker mask a shadow payment that is in effect a profit? Is there some understanding of a base wage for unskilled labor and everything beyond that is de facto a remuneration of human capital? Smith suggests as much in his analysis of wages, where he singles out training or education as one key factor to the formation of an above-average wage.Footnote 11 Furthermore, under competitive conditions, the profit rate on human capital would be bid down to the interest rate, an insight, at least for the return to capital in general, that Hume had established before Smith put pen to paper. If that is the case, why aren’t all skilled jobs paid the same wage, or wages directly in line with the investment in one’s human capital? The proverbial taxicab driver with a Ph.D. belies that possibility.
Third, if some of the human capital includes “talents,” as Smith avers, how is it possible to attribute these solely to an education or to on-the-job training? Talents are more akin to a gift from nature, and might therefore be better understood as receiving a shadow rent, an unearned residual that results from differential outputs. A tennis player ranked 100th in the world would gladly receive a tiny fraction of what a tennis player ranked in the top ten might earn, without any marked difference in working hours or labor expended. Surely, the difference is manifest in part as a shadow rent, a return to natural talents? Perhaps we should also coin “human rent” as a key concept?
Furthermore, if one decides to shift professions to increase one’s earnings, the prior human capital becomes a sunk cost. If a professional violinist becomes a forest ranger, there is no extant market whereby the musical dexterity could be directly traded for the acquisition of the conservationist skills of a forest ranger. There may be some carryover but it would be difficult to quantify. It is in this respect that aggregating human capital proves problematic. In addition to the turnover of workers from one career to another, the costs and benefits of training skilled workers might balance one another, with no net gain.
Finally, in what sense does human capital become realized across society? If human capital is understood as fixed in the personhood of an individual worker, and disappears when that person retires or dies, how does this become aggregated and improve the “fortunes” of the nation as a whole? It takes social resources to educate and train workers. Insofar as there is undoubtedly some depreciation of human capital, it is entirely possible that the stock in the aggregate might be depleting at the same rate as it is being accumulated. Given the problems of measuring its depreciation, and its accumulation for that matter, it is unwarranted to assume that the stock of human capital is coextensive with the working population. Aggregation persists as a perennial problem in economic theory, whether aggregating from individual demand schedules to the aggregate demand for a market as a whole, or for unemployed individuals to a national rate of unemployment, for example. Because the overall quantity of human capital is never static—a flow rather than a stock—it seems all the more challenging to accommodate the problems of depreciation, or the entry and exit from the workforce in terms of human capital. As this essay will demonstrate, many of these questions persist unresolved.
When an economist appeals to the “knowledge economy,” she must argue that there is a net accumulation of knowledge, not human capital as such. It is not unreasonable to argue that, during the past fifty years, the remarkable expansion of information in the digital age has in fact eclipsed the growth of genuine knowledge, understood traditionally as the set of propositions that are true and justified beliefs. Justification necessarily draws upon extant theories, and hence the growth of knowledge ought either directly or indirectly to deepen and render more coherent established theories.Footnote 12 However, most sciences, including economics, have been shedding laws rather than increasing them in number. The days of high theory seem to be in the past. Not only have economists yet to achieve a rigorous reduction of macroeconomics to microeconomics, but they have retreated to depicting economics as a mere toolkit. As Dani Rodrik argues, “[e]conomists build models to capture salient aspects of social interactions,” but there is no overarching unity to these models.Footnote 13 We may indeed know more singular facts about the world or have acquired more tools, but without a coherent theoretical framework in which to embed them, they may not prove enduring.
Furthermore, and as is well-recognized by experts on human capital theory, it may not be the content of the education (the knowledge imparted) that matters but the various behavioral traits that the education inculcates. Some economists argue that the typical graduate of high school or college is ill-equipped to perform most jobs and that training on the job is of comparable or equal value to the education per se.Footnote 14 In those “apprentice years,” the lower salary de facto covers the cost of on-the-job training, so that might prove the better place to single out the investment in human capital. Nevertheless, the primary focus of human capital theory remains directed to university education, even though, at least in North America, a Bachelor’s degree is aimed at forging a civil society, and the ideal of a liberal education is sharply contrasted with vocational training.Footnote 15 Although American universities also offer many professional degrees, the majority of these require a prior Bacheror’s degree. Perhaps we should limit human capital to adult education, specifically vocational training and advanced professional degrees at university, and set aside the education of children, adolescents, and the majority of undergraduates?
Human capital theory has become deeply entrenched in mainstream economics. Gary Becker’s Nobel Prize of 1992 has been reinforced by the more recent granting of the same prize, in 2023, to Claudia Goldin, who recently declared “that we are all human capitalists now.”Footnote 16 Bold claims are made that educational differences account for one-third to one-half of income discrepancies in the United States.Footnote 17 Other studies, looking to the past fifty years or so, have established a strong correlation between levels of education and retained earnings, with data that compares up to one hundred nations.Footnote 18 We can thus take this as a relatively established fact. But precisely why this transpires is still unclear. Not only is it impossible to single out education in the absence of a host of other factors, but there is also no clear-cut market for human capital (as distinct from a labor market), or clear-cut rate of return in the form of a profit. Human capital as a concept may turn out to be a category mistake.
I raise these questions, but do not have ready answers. My aim here is to trace some of the historical roots of the concept of human capital and then analyze some of the core assertions of contemporary theory. In particular, I single out the early British empiricists, John Locke, David Hume, and Adam Smith, of which only Smith, to the best of my knowledge, has been acknowledged as a progenitor of the theory of human capital.Footnote 19 All three wrote about educational reforms in the context of economic betterment. It is also worth underscoring that these Enlightenment philosophers argue that slavery is unethical and inefficient, but that slavery, or the shadow of slavery, remains the paradigmatic form of human capital. My objective is to demonstrate that much of the initial groundwork was set in the early modern period, and that contemporary human capital theory is indebted to these ideas. Understanding the historical background to this subject serves to expose the fact that some of the core concepts of human capital theory remain vague and under-resolved.
This essay will cast some doubt on the core causal claim that human capital, construed as an investment in education, results in higher per capita income. It may well be the case, at the surface, that increased schooling increases future returns for some or most individuals, or appears to do so for a region or nation as a whole, but why this happens under the microscope remains difficult to articulate. It is entirely possible that the causation works in the opposite direction and that economic growth results in the expansion of education that serves different ends. Let me be clear, however, that it is not my intention to discredit the value and merit of the empirical work done by economists who specialize in human capital theory. The correlations withstand scrutiny even if the causal mechanisms remain unclear.
Historical analysis
Of the modest literature that exists on the history of the concept of human capital, only Billy F. Kiker traces it back to the seventeenth century, particularly to the work of William Petty.Footnote 20 Kiker also lists a number of subsequent contributors after Adam Smith, singling out William Farr, Friedrich List, and Léon Walras in the nineteenth century, among a host of others. What is less well recognized is that these thinkers also discerned the fact that a better-educated workforce, as was found in Western Europe, had little to do with scientific ingenuity translating into technological advancements. Human capital was construed primarily in terms of dispositions to economic productivity rather than in terms of the advancement of knowledge. There was a widespread belief that practical knowledge was due to the accumulation of skills on the farm or in the brewery, but proves difficult to measure. Joel Mokyr argues that the great transformation from agrarian to industrial capitalism in Britain owed much to the advent of the Enlightenment, but it was limited to a subset of inventors and entrepreneurs, not to the widespread education of commoners.Footnote 21
In the wake of England’s Glorious Revolution of 1688 and into the early eighteenth century, economic discourse began to single out the concept of growth in terms of a larger population, a higher standard of living, and the overall expansion of domestic and foreign markets.Footnote 22 General descriptions, such as Daniel Defoe’s A Tour Through the Whole Island of Great Britain, pointed to bustling market towns such as Bristol and Glasgow.Footnote 23 Preliminary attempts to measure what we would call the gross domestic product (GDP) commenced in this period, along with estimates of the population of various towns or regions.
One of the most compelling arguments for economic growth was devised by Hume. Given the eightfold increase in the money supply versus the fourfold increase in the price level, the only feasible explanation of that inequality was that the greater stock of money was servicing a much greater number of market transactions.Footnote 24 Hume also singles out, circa 1750, the importance of a more informed and enterprising populace as a contributing factor to the recent surge in economic prosperity. As he notes, in the feudal era there was little inclination to industry, and the farmers and manufacturers alike were “ignorant and unskilful.”Footnote 25 But in the modern era, farmers, such as Hume’s elder brother on the family estate, were inspired to “study agriculture as a science.”Footnote 26 Hume also points to the role of practical skills in the manufacturing sector. Taking stock of Britain’s economic ascent since the Tudor era, Hume remarks: “[I]ndustry is much promoted by the knowledge inseparable from ages of art and refinement; as, on the other hand, this knowledge enables the public to make the best advantage of the industry of its subjects … by an application to the more vulgar arts, at least, of commerce and manufacture.”Footnote 27 The question is how did this knowledge spread among the lower orders, and in what sense could it inculcate different behavior? In the early modern period, individuals were thought to be born more or less alike; it is their upbringing and education that renders them distinct. René Descartes makes the claim at the start of his Discourse on Method that common sense is evenly distributed across persons,Footnote 28 and this gesture to the equality of men at birth is echoed by Baruch Spinoza as well as Gottfried Wilhelm Leibniz, Jean-Jacques Rousseau, and Denis Diderot.
The emphasis on nurture over nature was forcefully asserted by the early British empiricists. In his 1693 Some Thoughts Concerning Education, Locke offers a sweeping quantitative measure: “[O]f all the men we meet with, nine parts of ten are what they are, good or evil, useful or not, by their education. ‘Tis that which makes the great difference in mankind.”Footnote 29 Hume, in his essay “Of the Original Contract,” remarks on “how nearly equal all men are in their bodily force, and even in their mental powers and faculties, till cultivated by education.”Footnote 30 Smith attempts yet another measure, that “[b]y nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound.”Footnote 31 Their differences “arise not so much from nature, as from habit, custom, and education.”Footnote 32 As Samuel Fleischacker observes, “Smith [in direct opposition to Plato] consistently plays down the importance of inborn differences in talent… . [T]hat the division of labour creates such differences more than the other way around, is one of Smith’s most controversial claims.”Footnote 33
Contemporary human capital theory, at least until recently, has been deeply rooted in this same conviction; we are essentially blank slates at birth, unmolded clay so to speak, and we differentiate ourselves over time primarily by education and job training. Becker, with a nod to Smith, makes this explicit. Rather than “assuming that workers have intrinsic comparative advantages at different tasks, … [we assume] that all workers are intrinsically identical.”Footnote 34 To the best of my knowledge, no one has traced Becker’s assumption to treat individuals as tabula rasa back to the early modern philosophers or to underscore the Enlightenment chorus that voiced a paean to the critical role of education. But Becker and his contemporaries, such as Jacob Mincer, were well-read and well-educated, and so it is likely this stance incurred this debt. In sum, whether warranted or not, there is a deeply rooted belief in the receptivity of the average laborer to acquire knowledge and skills regardless of birth or natural abilities.
More recent economists, such as Flavio Cunha and James Heckman, are more drawn to the innate or genetic qualities that figure into the formation of skills. They adopt a model of life-cycle skill formation with the concept of “self-productivity” and the adage “skills beget skills,” to suggest an internal momentum and organic increase in one’s human capital over time.Footnote 35 Agents are born with human capital (which could reflect genes, parental education, income, and other fixed factors) and an initial endowment of skills that could expand over time. Cunha and Heckman consider a general technology of skill formation whereby early investments could matter more than later investments, such that it is not always possible to fully remediate earlier skill deficits. Increasingly, attention is paid to the quality of parenting and, more specifically, the level of education of mothers as the primary caregivers in child development.
Another central claim is an appeal to positive externalities, that many are uplifted by the increase in the education or human capital of those with whom they work.Footnote 36 Both Hume and Smith put much weight on our capacity for sympathy or fellow feeling and the extent to which this binds us together and reinforces our sociability and formation of customs and habits. As Amartya Sen first discerned, sympathy is itself a prime example of an externality, an unpriced spillover effect of productive activities.Footnote 37 Insofar as human capital is not tradeable on an open market, it is only of value vis-à-vis a community, and it can only add net value if the outputs exceed the inputs (the costs of the education), and that might only happen if there are positive externalities. The shift to an economy dominated by the service sector, now close to eighty percent of GDP in the United States, has arguably made even more salient the appeal to humans as highly malleable repositories for the formation of knowledge and skills that in principle benefit others for free. Whether we are truly equal at birth, intrinsically identical or not, the point is that those who invest in their human capital bootstrap those around them.
Early modern economics is replete with proposals for bolstering and reforming education. The popular 1664 tract by Thomas Mun, England’s Treasure by Forraign Trade, addresses the qualities a merchant ought to possess, such as extensive knowledge of navigation, ship building, foreign languages, customs, and currencies.Footnote 38 He also promotes the expansion of domestic manufacturing, such as of woolen cloth or ships, based on accumulation of practical knowledge and skills. Locke’s Some Thoughts Concerning Education is a landmark contribution to the discourse on education in early modern Europe. While his focus is directed primarily to the education of a gentleman, he pays close attention to early childhood and the inculcation of good habits for both boys and girls. He argues that the prevailing education is too stifling and advises parents to give their children much more freedom to explore and roam outdoors.Footnote 39
Locke’s primary aim is to forge a man of wisdom in order to manage his estate productively, and this is best done by education at home, under the guidance of his father, not by not sending his son away to boarding school where he would be more influenced by his peers. As for the study of science, Locke advocates learning astronomy and mathematics but discredits the study of natural philosophy (physics and chemistry) because he finds it to be too speculative and inconclusive. In addition to the existing curriculum, Locke proposes that a gentleman learn an array of practical skills, including gardening, woodworking, engraving, lens grinding, and perfuming.
Locke defines wisdom as in essence practical wisdom, to wit, “a man’s managing his business ably and with foresight in this world.”Footnote 40 He provides a long list of virtues to be inculcated over time, such as courage, honesty, patience, and prudence, as well as a list of childish vices, such as sauntering, which must be supressed. Locke advises a father “to bestow two or three days upon his son to cure so great a mischief as is sauntering at his business.”Footnote 41 Moreover, a young man ought to learn merchant accounting in order to “preserve the estate.”Footnote 42 As a leading voice for the Protestant work ethic and early capitalism, Locke weaves appeals to industriousness and enterprise throughout his account of the ideal education.
Hume writes only indirectly on education, but in certain respects, he casts a broader net than Locke or Smith, insofar as he offers estimates of the aggregate stock of knowledge and ignorance in the modern commercial world.Footnote 43 He puts much value on ingenuity, in both the sciences and artisanal activities. If citizens of a country covet an imported good sufficiently, they will find the ways and means to produce it domestically and, in Hume’s view, inevitably improve upon it: “Imitation soon diffuses all those arts; while domestic manufactures emulate the foreign in their improvements, and work up every home commodity to the utmost perfection of which it is susceptible.”Footnote 44 With superior goods, the imitators capture a larger share of the global market and the nation prospers. This is in essence an appeal to human capital engendering economic growth, insofar as the adoption of more skilled modes of production would raise standards of living. Moreover, Hume sees these skills as transferable. If one masters the production of woolen cloth, it is much easier to switch to other textiles and, he suggests, hardware manufacturing: “If the spirit of industry be preserved, it may easily be diverted from one branch to another; and the manufacturers of wool, for instance, be employed in linen, silk, iron, or any other commodities, for which there appears to be a demand.”Footnote 45 If Hume was correct about the transferability of skills, England’s capturing the global market for finished cotton cloth and hardware by the early nineteenth century was a direct consequence of their earlier prowess in the production of woolen cloth.
In selected passages across his texts, Hume offers insights into his vision of the right education. As a qualified skeptic and thoroughgoing empiricist, Hume voices disdain for the doctrinal schooling of his day, for it “commands our assent beyond what experience will justify” and is the source of over half of our ill-formed opinions.Footnote 46 He expresses the hope that education might undergo major reforms in the future, but also praises the modern emphasis on “humanity and moderation.”Footnote 47 He also promotes the study of history, for both women and men. Given that actions should be tailored to the evidence but that our lives are short, history provides an abundance of data on the human condition: “A man acquainted with history may, in some respect, be said to have lived from the beginning of the world, and to have been making continual additions to his stock of knowledge in every century.”Footnote 48 Knowing history also serves to temper one’s passions, especially for a man of business who is “more apt to consider the characters of men, as they have relation to his interest, than as they stand in themselves”; studying history will tend to moderate such one-sided judgments.Footnote 49
Furthermore, as Hume avers, a study of the “sciences and liberal arts softens and humanizes the temper, and cherishes those fine emotions, in which true virtue and honour consists. It rarely, very rarely happens, that a man of taste and learning is not, at least, an honest man, … [and instills in] him a greater sensibility of all the decencies and duties of life.”Footnote 50 Habitual study inculcates a work ethic such that “indolence will seem a punishment to him.”Footnote 51 The mind requires exercise such that its “powers and faculties” are enlarged by constant action and industry.Footnote 52 An enlightened world is one that also improves the skills of the artisanal sector: “The same age, which produces great philosophers and politicians, renowned generals and poets, usually abounds with skilful weavers, and ship-carpenters. We cannot reasonably expect, that a piece of woollen cloth will be wrought to perfection in a nation, which is ignorant of astronomy, or where ethics are neglected.”Footnote 53 Knowledge, for Hume, while always probable rather than indubitable, is a collective good both for its moral and economic gains. His celebrated chain of “industry, knowledge, and humanity” captures well the mutual benefits of education and economic flourishing.Footnote 54
In “Of the Rise and Progress of the Arts and Sciences,” Hume traces the evolution of human knowledge. His primary argument is to establish the superiority of the modern period, and to show that artisanal production had much improved due to the practical sciences of navigation, fortification, and surveying. Yet he suggests that it is the spread of trade and commerce that engenders improvements in education: “[I]t is more easy to account for the rise and progress of commerce in any kingdom, than for that of learning …. You will never want booksellers, while there are buyers of books: But there may frequently be readers where there are no authors.”Footnote 55 As an example, Hume points to a dearth of “eminent writers” in the thriving commercial republic of the Netherlands.Footnote 56 In sum, knowledge is more an effect than a cause. The autocratic regime in China explains in part “why the sciences have made so slow a progress in that mighty empire,” notwithstanding its wealth that was believed to be comparable to Europe.Footnote 57 China showed that advancing scientific knowledge is not a necessary condition for a nation to flourish economically, or so Hume believed.Footnote 58 Of greater importance is the type of political regime. For Hume, it is only in a world of relative liberty that one would find rapid progress in the sciences and arts, including “the manual arts and manufactures.”Footnote 59
Adam Smith was one of the first to argue that the state ought to provide universal education, including for women.Footnote 60 He praises the Scottish parish system that had promoted a broad curriculum and had significantly reduced illiteracy. By the early eighteenth century, most commoners could read the Bible, albeit in English and not in Gaelic. For Smith, the primary aim of an education is to forge a civil society, people who are “instructed and intelligent,” “more decent and orderly,” and “more capable of seeing through, the interested complaints of factions and sedition.”Footnote 61 This would safeguard against civil war or revolution because “the safety of government depends very much upon the favourable judgment which the people may form of its conduct.”Footnote 62 In contrast to Locke, Smith argues for the study of science by the general public as “the great antidote to the poison of enthusiasm and superstition,” because he believes that a more secular world would be more conducive to peace and prosperity.Footnote 63
Interestingly, Smith observes that the traditional education of upper-class women is far more effective than the education for men, insofar as such women, including his own mother, fulfilled their duties as the manager of the household and provision of early education: “Every part of their [women’s] education tends evidently to some useful purpose … [and] [i]n every part of her life a woman feels some conveniency or advantage from every part of her education. It seldom happens that a man, in any part of his life, derives any conveniency or advantage from some of the most laborious and troublesome parts of his education.”Footnote 64 Presumably, he had in mind the difficulty of gleaning a pecuniary return, for men, from the study of Latin declensions. In this assertion, Smith shares with Locke an overarching view that education ought to be more efficient and directed at manifest outcomes.
As Istvan Hont demonstrates, the early modern period of economic discourse was preoccupied with the “rich-country-poor-country debate.”Footnote 65 Much ink was spilled to ascertain the factors and explain why a country such as Spain, which had quickly amassed vast quantities of silver and gold from Latin America, had fallen far behind one such as England. The miraculous ascent of the Netherlands also figured prominently in this debate, as well as the strength but insularity of China. There was also a fascination for cataloguing and explaining differences in national characteristics, most famously Montesquieu’s appeal to geographical factors in his 1748 The Spirit of the Laws.Footnote 66 Hume challenges this account, noting that the same climates produced significantly different traits. The primary mechanism at work is sympathy among those nearby, and for this reason, he argues, national identities were highly contingent on time and place, and ever in flux.Footnote 67
The importance of these discourses is not the findings per se, some of which sound highly biased to our ears, but the fact that they prompted new lines of thinking and linked differential rates of economic growth with specific factors. Smith’s great tome, An Inquiry into the Nature and Causes of the Wealth of Nations, argues that it is the “productive powers of labour” rather than natural resources that explains the economic inequalities of different nations. A nation’s wealth could be judged by two factors: “first, by the skill, dexterity, and judgment with which its labour is generally applied; and secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.”Footnote 68 Both have evident appeals to what could charitably be labelled human capital. Furthermore, Smith proposes that Latin be replaced by mathematics and mechanics, insofar as “[t]here is scarce a common trade which does not afford some opportunities of applying to it the principles of geometry and mechanicks.”Footnote 69
This suggests that Smith was cognizant of the prospect of harnessing scientific education for economic growth. His famous analysis of the pin factory lists inventiveness as one of the three motivations to increase the division of labor; the other two are the reduction of sauntering and improved dexterity. The specific argument asserts that “[m]en are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things,” and that “[w]hoever has been much accustomed to visit such manufactures, must frequently have been shewn very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of the work.”Footnote 70 Smith points to an unnamed boy whose sole task was to open and shut the divider between the boiler and the central cylinder of a Newcomen steam engine, and who, because he sought more leisure time, linked the motions with a string so that the two moved in tandem without his effort. This is a poor argument on many counts. For one, the boy had little control over his workday and was unlikely to be incentivized to acquire more leisure time in this manner. For another, the improvement of the system of valves on the Newcomen engine did not rely on the addition of strings. And finally, there is no historical record of such a boy. While many key inventions were spawned on the shop floor, it is highly doubtful that these were motivated either by the division of labor or the desire for increased leisure time.
In Book IV of the Wealth of Nations, looking to ancient Rome, Smith revisits the prospects of inventiveness in the workplace. He claims that slaves had little to no incentive to undertake inventions, and that “all the most important improvements” were the result of “freemen.” Drawing on Montesquieu, Smith goes on to contrast the output of the Turkish mines manned by slaves with the nearby Hungarian mines, where waged laborers “employ a great deal of machinery, by which they facilitate and abridge their own labour.”Footnote 71 Moreover, it was the unslaved who had the technical skills to use the machinery. Smith also points to the importance of expert inventors, “a peculiar tribe or class of philosophers,” who do not work in the factory: “All the improvements in machinery, however, have by no means been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade.”Footnote 72 He is here acknowledging both the labor-saving attributes of machinery and the fact that they embody accumulated knowledge.
The concept of human capital is indebted to Locke’s notion of self-possession, or what C. B. Macpherson labels “the doctrine of possessive individualism.”Footnote 73 As James Tully argues, Locke’s central claim that we have property in our own person stems from an analogy to God as our maker.Footnote 74 Insofar as God’s dominion extends over all things, and we humans are his product and were created in his image, by extension we humans have dominion over that which we create. We literally mix our labor with external objects, picking berries or nuts or digging in the soil and planting grains. We own our body and mind in the sense that we have rights over all that we extract using our body and mind.Footnote 75 Gopal Sreenivasan, in his careful study of Locke’s theory of property, names this “the doctrine of maker’s right.”Footnote 76 More importantly, he observes that “man’s capacity for making something and his capacity for owning something both depend on his intellectual nature … [and hence] that man owes his capacity for property to his intellectual similarity to God.”Footnote 77
Prior to Locke, Descartes devised a number of compelling arguments to demonstrate that God is singular, immaterial, infinite, omniscient, and eternal, among other attributes. Our human minds by contrast are finite and imperfect, but partake in God’s perfect mind. Our essence therefore is mental rather than bodily and it would behoove God as an omnibenevolent being to grant us each the same attributes at birth.Footnote 78 Locke shared this view. The transition between a man and a person lies, for Locke, in education and the acquisition of knowledge. In his 1677 unpublished journal, Locke writes: “Nature furnishes us only with the material, for the most part rough and unfitted to our use; it requires labour, art, and thought, to suit them to our occasions.”Footnote 79 Labor involves one’s body and one’s hands, but also one’s mind and what Locke calls “art,” which in essence means practical knowledge or skill.
Locke was seminal to early modern economics for establishing a liberal ideology that decreed a set of freedoms and rights, including the right to contract one’s labor for a wage. The critical, not to mention ironic, point is that Locke positions ownership of one’s body and mind in a positive light, and he does so partly to discredit slavery. Although Locke does not explicitly articulate the concept of human capital, insofar as he links personal enterprise and ingenuity with an expanded estate and the augmentation of one’s wealth, he is in a preliminary manner suggesting that a strengthening of one’s bodily and mental efforts results in a higher yield. Industriousness is for him the reason why ten acres of a cultivated field in Devon is as or more productive than one hundred acres of uncultivated land in England or one thousand acres in the interior of America.
In sum, we have seen that many key ideas of contemporary human capital theory were articulated by early modern philosophers. Their disdain for slavery, their treatment of humans as blank slates and as equal at birth, the promotion of universal education and various reforms of education for commoners and the elite as well as men and women, were in part if not in whole directed at economic growth. Locke, Hume, and Smith each articulate various ways in which an improved education would modify behavior, such as the reduction of sauntering or the promotion of inventiveness. They reflect on knowledge as an aggregate force for social progress, including economic prosperity. Above all, the idea that one could fix skills or abilities in oneself over time and receive a positive return, owes much to Locke’s thesis of possessive individualism. Human capital theory makes little sense if there is not self-ownership and self-determination. These ideas laid the foundations for the formulation of the theory of human capital established in the twentieth century.
Philosophical analysis
By and large, the phrase “human capital” did not take hold until the 1960s, possibly because of its associations with slavery. When slavery was abolished in Britain in 1833, Parliament acknowledged the capital loss and issued a series of bonds to raise funds to compensate the slave owners. Insofar as nothing was given to compensate the slaves for their shadow wages, this anchored all the more the sense in which slaves were viewed as human capital. Moreover, Irving Fisher, the first to coin the phrase in 1897, positioned his account of human capital in the context of slavery. Fisher wrote when social Darwinism was ascendant, and became a well-known enthusiast of eugenics, a program for eliminating the weak and breeding a superior human race. Fisher writes that “man is ‘material’—as truly as a horse or an ox. He is ‘appropriated’ whether the owner be another person, as in the case of slavery, or himself as in the case of freedom… . With the extinction of slavery, a man cannot sell himself completely, but he may sell rights in himself, that is, rights to his service.”Footnote 80 We may never be certain as to what Fisher had in mind, but a Lockean interpretation fits this account. A person may choose freely to hire out their labor services and temporarily sell the right to direct that labor to another person, their employer, without any whiff of slavery.
Nevertheless, the stigma persisted. Theodore Schultz, a winner of the Nobel Prize, observes in 1992, albeit with the aim of starting anew:
Our values and beliefs inhibit us from thinking of human beings as capital goods, except in slavery, and this we abhor. We are ever mindful of the long struggle to rid society of indentured servitude and slavery and to evolve political and legal institutions to keep men free of bondage. Hence, to treat a human being as capital could appear to reduce man, once again, to a mere material component, as if he were a piece of physical property.Footnote 81
Gary Becker, undoubtedly the most celebrated contributor to human capital theory, acknowledges similar misgivings in a public address of 1989 given at the University of Chicago: “In the early days, many people were criticizing this term [human capital] and the underlying analysis because they believed it treated people like slaves or machines.”Footnote 82 To avoid criticism, he provides a subtitle to his celebrated study, Human Capital, namely, A Theoretical and Empirical Analysis with Special Reference to Education.Footnote 83 Becker acknowledges historical antecedents to his line of thinking, including Adam Smith, but nonetheless proclaims his work to have unleashed a “revolution.”Footnote 84 In one respect it did. According to a recent study of the databank offered by EconLit, while infrequently used until the 1990s, the phrase “human capital” is now found in fifteen percent of the journal literature in economics, and has thus become thoroughly benign and mainstream.Footnote 85 In another respect, however, Becker’s work is the outcome of a long thread of ideas, reaching back to Locke, Hume, and Smith.
A core proposition of the theory of human capital, as noted in the subtitle to Becker’s seminal book, focuses on education. According to Harvard economist David Deming:
Human capital theory is the now widely accepted idea that education, training, and other forms of learning are investments that pay off in the future. Like any capital investment, the costs of schooling are paid up front and the benefits are earned later. To be sure, schooling has benefits far beyond its monetary value, but the relationship between schooling quantity (and quality) and future earnings is one of the most robust findings in social science.Footnote 86
The idea is that humans are born as if they possess an empty bank in which could be deposited a wide array of skills and dispositions that enhance their human capital and from which they could make withdrawals at later points in their active working life. It is unclear, however, what happens to the capital upon retirement. Is it analogous to a machine left idle, or does it gradually disappear, assuming that the person ceases to receive a wage?
The capital depreciates, to be sure, as the skills are superseded by new technologies or reduced by such factors as illness. But human capital could also be enhanced by acquiring additional skills or knowledge, or migrating to a place where the skills are more highly remunerated. It is also possible that the human capital appreciates, akin to a bottle of wine that improves with age.Footnote 87 A central proposition is that education, both formal and informal, academic or vocational, compulsory or volitional, is in essence an investment in one’s human capital, and this capital has a market value that endures over time. The deferred entry into the workplace, much like the deferred consumption that is channeled into the formation of physical capital, purportedly results in higher returns at a later point in time.
What contemporary economists mean by “human capital,” however, remains vague. Some limit it to education and job training, while others attend to policies for migration, the reduction of warfare, and the promotion of public health and longevity. Anything that improves the quality of the populace qua economic productivity, and that is not reducible to physical capital or natural resources, could be treated as human capital. As Claudia Goldin and Lawrence F. Katz observe:
Human capital theory is the notion that an investment in human beings today has a payoff in the future. The investment can be in education, training, health, job search, migration, or anything that impacts income or productivity in the future. One implication of human capital theory is that individuals have a capitalized value (based on their expected future earnings) that can be augmented through investments, as well as reduced by depreciation, illness, injury, or job loss. The theory expands the static notion of the value of skills and places it in a dynamic framework.Footnote 88
One problem with this claim is that it would be challenging to isolate any given factor and establish more than a mere correlation. The so-called dynamic framework dilutes the role of education by introducing other factors, such as health and migration, for example. One doesn’t need to be an economist to grasp that a healthy worker is likely, on average, to have higher earnings in the future. The source of that good health will necessarily be multifactorial, drawing upon local access to medical care, knowledge about nutrition and exercise, and the quality of one’s environment. One might benefit above all from common sense or a willingness to migrate if resources to good health are inadequate.
The case of investments in good health as a form of human capital also exposes the sliding back and forth between the decisions undertaken by an individual and the role of the state. Is one able to control one’s health sufficiently with an eye to future earnings, or does this rest on state policies that govern access to resources either for one’s childhood or one’s adulthood, or both? Clearly, government policies to provide good sanitation, clean air and water, or ensure safe working conditions are critical, as is childhood access to iodine and fluoride. As François Villermé, an early nineteenth-century epidemiologist, detected in his statistical study of the workers of Mulhouse in northern France, “death is a social disease.”Footnote 89 It was clear that the workers suffered more because of the disgraceful living conditions, poor sanitation, and the horrific conditions in the mines and factories than because, as was widely purported, of individual decisions to lead a ruinous life.
Studies of migration are perhaps more insightful. A key piece of the argument is that, by importing adult workers, a nation incurs a net saving, because fewer resources are sunk into their childhood and education when earnings are nil. Immigrants often come with children, however, so the net gains may wash out, unless a country only admits skilled immigrants past their child-bearing years. Interestingly, Hume makes a similar argument circa 1750, linking cattle, children, and slaves. Just as it was much cheaper to breed and graze cattle in Derbyshire and then drive them to the London beef market for slaughter and sale, it was far cheaper to raise children in poorer regions and bring them to London at adulthood than to raise them in London. He suggests the same pattern held for slavery, albeit because of “avaricious masters,” and this explains why the birthrate for slave households was much lower than that of the unslaved:
The comparison is shocking between the management of human creatures and that of cattle… . [Nevertheless] near all great cities, in all populous, rich, industrious provinces, few cattle are bred… . To rear a child in London, till he could be serviceable, would cost much dearer, than to buy one of the same age from Scotland or Ireland; where he had been bred in a cottage, covered in rags, and fed on oatmeal or potatoes. Those who had slaves, therefore, in all the richer and more populous countries, would discourage the pregnancy of the females, and either prevent or destroy the birth.Footnote 90
Hume also notes what was common knowledge, namely, that a child born into slavery would be indulged and hence not work as hard as one captured in adulthood. These claims serve to highlight the high cost of raising children, then and now, as well as the long-standing tendency to shift those costs onto the shoulders of others.
Let us put aside the appeals to health and migration, and focus on Deming’s boast that the correlation between schooling and future earnings is one of “the most robust findings in social science.”Footnote 91 As he points out, the inequality of incomes in the United States has been increasing, as has the real cost of education, rising from 3.1 percent of GDP in 1950 to 7.1 percent in 2018. Are the two connected? Thomas Piketty directs our attention to the underlying wealth effects of an elite class of “supermanagers” that have also increased the gaps between the upper one and ten percent of salaried persons from those in the bottom fifty percent.Footnote 92 But he is reluctant to attribute these gaps solely to education, if only because his own native country, France, has less inequality while supporting an excellent system of state education, albeit with some elite pathways.Footnote 93 The situation in the United States, however, might suggest otherwise. A recent study estimates “that education accounts for over half of the growth in [the inequality of] US labor and capital income.”Footnote 94
No one disputes that it is only at the level of the group that the correlation asserted by human capital theory could be corroborated. That is to say, it might well be the case that individuals on average who have invested in additional education are likely to have higher earnings, but there will always be exceptions. Large data sets and time series analyses are critical for providing empirical support to the core assertion. Nevertheless, even if one sticks solely to education, and removes the other dimensions of human capital listed above (migration, health, and so forth), the correlation might prove spurious. It may not be the education per se that contributes to economic growth, higher standards of living, or greater income inequalities, but the advent of new technology, the absence of major on-site wars, or increasing monopolization that enables firms, such as those in Big Tech, to pay astronomical salaries. Education simply accompanies these more fundamental factors.Footnote 95
Some periods of rapid economic growth, notably Britain’s industrial revolution that transpired from about 1750 to 1830, witnessed very little change in educational policies or access to schooling. The abuse of child labor was notorious and yet, the official inquiries commissioned by Parliament in the early 1800s tended to portray the well-being of children in the factories in a positive light.Footnote 96 It is a challenge to comprehend the rhetoric of the time, but it is entirely plausible that the surge in national income, more than humanitarian sentiments, motivated the government to introduce state-funded education for children in the 1830s, culminating in the Elementary Education Act of 1880 that made attendance at school mandatory. Prior to that period, schooling of the commonfolk was offered by the local parish and primarily funded by the Church. Similar claims might be made for the economic surge of Russia in the 1930s or perhaps China in the 1970s. Vladimir Lenin had mandated the elimination of illiteracy, but it was only by the end of the 1930s, in the wake of dramatic economic growth, that this came to pass. Investments in human capital or improved access to education may have been effects rather than causes of economic growth and increasing standards of living.
It is also unclear whether it is the quality or quantity of schooling that counts more for future earnings. Finland and South Korea, for example, have each repeatedly placed in the top ten for the quality of primary education among global rankings undertaken by the World Economic Forum, but their respective economies, while healthy, do not display rapid increases in standards of living, at least in comparison to China, for example. Another example that casts doubt on an appeal to the quality of the education is the correlation among the top earning lawyers in the United States and their degrees held from lower-ranked law schools. Yet another argues that investment in an education at an elite private university in the United States is not about the education per se, but rather about the social contacts forged for career advancements. Michael Spence’s Nobel prize-winning “signaling model” maintains that individuals invest in education primarily to gain credentials that effectively signal their superior ability for employment. This tends to discriminate against those without similar credentials, many of whom may be just as able or qualified for a particular job. As Deming observes, “[i]t is difficult to disentangle human capital and signaling empirically, and both explanations surely contribute somewhat to explaining returns to education.”Footnote 97
The findings of each and every one of these studies have limitations, insofar as some decisions must be made about the size of the domain and the time period at hand. Goldin and Katz, for example, pioneered a number of important studies that correlated the increase in public education over the first four decades of the twentieth century in the United States with economic growth and higher standards of living, but, as is widely recognized, some of the surge was due to periods of massive immigration and the entry of women into the labor force during each of the World Wars.Footnote 98 Furthermore, the exponents of human capital theory were able to persuade the American government to invest heavily in education at a time of marked growth, as exemplified by John F. Kennedy’s “war on poverty.” Laura Holden and Jeff Biddle show that the significant boost to funding of public education in the 1960s is a case of the tail wagging the dog.Footnote 99 Bryan Caplan persuasively argues in The Case Against Education that augmented human capital in the form of more education reflects rather than causes economic growth.Footnote 100
There are also studies that suggest a backward-bending curve between years of education and future earnings, that the net cost (including the opportunity cost) of the prolonged training of doctors, lawyers, and professors outweighs the lifetime accumulation from salaries. Arthur Lovejoy, among others, observes that for many in these professions, particularly academics, it is the nonpecuniary benefits that ultimately compensate for otherwise reduced earnings across a lifetime.Footnote 101 The legal profession is particularly beset with attrition.Footnote 102 Even the vast majority of engineers, a few years after graduation, end up essentially as salespersons. The same is true in the sciences. Less than 10 percent of scientists with Ph.D.s remain in pure theory. Foundational education is required for that 10 percent, but for the other 90 percent, the many years spent in tertiary education learning esoteric proofs most likely proves wasteful from an economic standpoint. This does not mean that the curriculum should be reformed; challenging proofs may develop the human mind in a manner that has indefinable benefits. The point is simply that were education to be directed primarily at economic payoffs, it would not take the shape and form that it has, past or present.
There is a vestige of the guild at work in the elite professions. By erecting barriers to entry, there are inevitable distortions in play. Alfred Marshall famously recruited students from the mathematics tripos at Cambridge not because Marshall was earnestly inclined to transform economics into a mathematical science, but because he wished, as a second Wrangler, to create a barrier to entry that distinguished economics as an elite pursuit. (He also renamed it economics, in place of political economy, in order to render it more impartial.) Marshall’s most famous recruit, John Maynard Keynes, ranked twelfth on the mathematics exams, yet he also upheld the tradition of literary economics and discredited, for the most part, the work of econometricians. The long-standing professions of law and medicine also instill numerous barriers to entry and ensure that the numbers are limited so as to shore up higher salaries.
Even more obvious is the historic dearth of women and visible minorities in many professions. This trumpets the fact that biases, conscious or unconscious, have induced substantial inefficiencies. After all, for about a hundred years, most Americans, male and female, have had access to a high-school education, and by the latter part of the twentieth century, about 50 percent attended college for at least a year. For decades, the majority of Americans who attended university and received a Bachelor’s degree have been women, yet their future earnings are on average still significantly below that of men.Footnote 103 This suggests that the investment in tertiary education, directed at economic outcomes, is suboptimal to a serious degree.
Deming admits as much: “However, just because school spending is economically productive on the margin does not mean that the money is spent optimally. It can be simultaneously true that school spending is productive and that much of it is wasted. We can probably always do better, and so innovation and experimentation are critical for increasing the productivity of human capital investments.”Footnote 104 In other words, the fact that the results are not maximized does not, of course, undermine the core principle of human capital theory, namely, that investment in education results in higher future earnings. Women without college degrees, on average, receive lower salaries. The brute fact of gender pay gaps, however, suggests that there are many other mitigating factors. Some of the literature acknowledges this by keeping the data gender-specific.Footnote 105
The word “schooling” noted by Deming is critical, because the “robust finding” tends to work best with an eye to elementary and secondary education. He also suggests that the recent increase in preschool attendance, from 15 percent of American toddlers in 2003 to 34 percent in 2019, might have a greater impact than later stages of childhood or youth.Footnote 106 Access to preschool varies considerably from nation to nation, arguably more than elementary school education. The general trend of G7 countries is to lower the age of entry such that children are often in school by the age of four. Perhaps this fact alone has served to enhance the stock of human capital and boost higher earnings among many wealthier countries?
The term “human capital” may be a misnomer. Holden and Biddle call it a metaphor.Footnote 107 Clearly, if capital is defined as anything that assists labor, it seems impossible to separate the labor from the “human capital.” In that respect, it appears to be a category mistake. Becker’s brilliant move in the face of these difficulties was to reduce all labor to human capital. That, however, exposes all the more the difficulty of defining capital. If there is but one factor of production—capital—the spotlight turns toward defining the different types of capital, and that raises other intractable problems. How, for example, does one demarcate human capital from social capital? As historians of science argue, the acquisition of knowledge is strongly connected to forging sociability and trust because one must take most knowledge claims on faith.Footnote 108 Others expand the ambit, speaking, for example, of spiritual capital or content capital.Footnote 109
If human capital exhausts the domain of human labor, perhaps there is no such thing as pure and unadulterated labor, one that requires no skill whatsoever? Or perhaps one could arbitrarily assign the base or minimum wage, and assume that everything included above it is de facto a profit, a return to capital. It should not be forgotten, however, that salaries for elite athletes or musicians, for example, also include rent as a return to natural or innate talent. Just as David Ricardo carefully distinguishes the rent of land as a residual from the profit of the capital invested in a farm, and motivated rent as a return to a gift from nature,Footnote 110 so too it might be more appropriate to treat the return to labor as in part the profit on one’s human capital and in part the rent as a return to one’s natural abilities or situatedness. These difficulties suggest that human capital does little to enlighten us as to differentials between individual salaries, particularly where there are major discrepancies.
Deming, one of the few contemporary economists to probe the concept of human capital, unpacks it in terms of inculcating methods and dispositions rather than the acquisition of knowledge. He points to a number of behavioral attributes that a typical education would cultivate, such as “patience, self-control, conscientiousness, teamwork, and critical thinking.” Studying mathematics at school embeds the value of cumulative learning and strengthens problem-solving abilities in the workplace—the math itself is of little value unless one becomes a scientist—while studying the natural sciences cultivates curiosity. A study of the social sciences serves to appreciate the value of counterfactual reasoning, while a study of the humanities instills empathy and respect for others; both serve to deepen one’s understanding of human behavior that might be conducive to a more harmonious and productive workplace. At times, educational policy makes this explicit. One amusing example is a policy imposed in Maine in 1896 that foregrounded the teaching of empathy. Teachers were obligated to “impress upon their pupils the principles of morality and justice, the love of truth, country, humanity, industry, and frugality, as tending to preserve republican institutions and social and individual happiness, and public school teachers are required to consume not less than ten minutes each week in teaching their pupils kindness to birds and other animals.”Footnote 111
Education reinforces certain predilections to be patient, prudent, and punctual. Pupils in their early years are rewarded for cleanliness, cooperativeness, and general dispositions toward sociability. There may be other agendas at work, such as military superiority. We saw that Smith advocates that gymnastics replace Latin in the education of commonfolk in order to foster bodily strength and thereby improve the capacity among boys to become soldiers. Thorstein Veblen, in The Theory of the Leisure Class, brilliantly discerns that the preoccupation in American secondary and tertiary education with male competitive sports such as football was in part a means to keep alive the martial spirit and thereby bolster national security.Footnote 112
A Marxist might argue that compulsory education, particularly in periods of rapid economic growth in the United States over the twentieth century, produced a compliant and disciplined workforce, ready to enter the factory or the mine, work indoors in relatively grim settings, and punch timeclocks. Schooling sets one on a path of a regimented day, eating lunch at a certain hour and confining playtime to the recess period. Even the sound systems used at school to block out the periods of the day resemble the whistle of a factory. Furthermore, the system of grading instills the belief that the world is inherently hierarchical and competitive, that one’s self-worth or singular attributes could be measured and ranked, or that it is imperative to submit to a system where grades serve as gatekeepers. Education is not inherently democratic; it is grounded in accepting the authority of one’s superiors and experts. One does not vote on one’s grades or on the content of one’s curriculum. Much of what one receives in an education is not negotiable and is imposed from above. In sum, the surge in standards of living due to compulsory elementary and secondary education was not exclusively about the curriculum, but rather about the behavioral norms inculcated in the process and, arguably, the diminution in autonomy.
Karl Marx and Veblen aside, most subsequent economists have viewed the discipline and work ethic that comes with a basic education as conducive to economic gains, both individual and collective. The main argument is that the traditional factors of production—natural resources, labor, and physical capital—do not complete the story as to why certain regions of the world flourish economically while others do not. Everything points to the role of human capital, however vaguely defined or inadequately measured, as filling in the gaps. This essay has raised a number of questions for which there are no clear answers. As a general conclusion, I have demonstrated the historical depth to the concept of human capital. Locke, Hume, and Smith bequeathed to us important insights into homo faber that are still relevant to mainstream theory at present.
Acknowledgments
I wish to thank my research assistant, Zoe Zhiyu Luo, and the editors of Social Philosophy & Policy. Versions of this essay benefited from presentations at workshops or conferences held in the following cities: Tempe, Vancouver, Bloomington, Liège, and Dubrovnik.
Competing interests
The author declares none.
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